Why Global Growth Hit A Wall: China Credit Growth Continues To Slow

QUICK TAKE:In short, our thesis is that city-level and regional macroprudential tightening policies in China currently will render economic growth in 2Q18, but more importantly 2H18, dismal; we believe this will spread to emerging markets, rendering the “global coordinated growth” bulls out of sync with reality. This, we believe, in turn, will weigh on metals prices, pushing many of the commodity pundits (i.e., Jeffery Gundlach) to reassess their bullishness. As this happens, we expect steel/bulk exports out of China to rise (as profitability domestically falls with weakening domestic demand) pushing global bulk commodities prices lower.

Exhibit 1: China Total Credit Growth versus Bank Asset Growth, %Y/Y

Source: Peoples’ Bank of China (PBOC), Vertical Group.

Exhibit 2: It Appears Emerging Markets are no Longer “Feeling the China Love”

Source: Bloomberg, Vertical Group.

So how do things look at this juncture? Well, below we highlight the key takeaways from China’s April 2018 data dump. However, in short, looking at the below data in aggregate, we believe our thesis remains firmly intact; furthermore, in checks “on the ground” in China this week, we learned that the Consensus among domestic traders is that steel prices in China have “peaked” for the year as of this week.

GROWTH INTERNALS. As detailed below, while Y/Y industrial production growth edged higher to +6.9% in April 2018 (from +6.8% in March 2018), the all-importantFixed Asset Investment metric in China hit lows not seen in nearly two decades (at +7.0% Y/Y for April 2018 vs. +7.5% Y/Y in March 2018), while retail sales also dipped lower in the month of April at +9.4% Y/Y (vs. +10.1% Y/Y in March 2018). At risk of stating the obvious, at the margin, this suggests to us that China’s key growth internals are indeed slowing.